The Existence of Informationally Efficient Markets When Individuals Are Rational
AbstractA rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price-contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating functions, this paper shows that individual investors en- dowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the ex- pected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without informa- tion acquisition are Pareto efficient.
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Bibliographic InfoPaper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt5tf543q2.
Date of creation: 01 Aug 2004
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Information Acquisition; Information and Market efficiency; Asymmetric;
Other versions of this item:
- Marc-Andreas Muendler, 2004. "The Existence of Informationally Efficient Markets When Individuals Are Rational," CESifo Working Paper Series 1295, CESifo Group Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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